Updated: Jul 19
To build a new product the cost is around 1 million US dollars. If you spend anything below that amount you won't get a quality product anyways. If you want to successfully get investment from VC or PE, this is the minimal cost to spend on your own.
Cost for making a product include the costs of
Unique design and name;
Marketing through the channel;
Although it is possible to get a product through the ODM/OEM route, or get a MVP (minimal viable) for just a few thousand dollars, it is not likely to create a long lasting business or a growable business.
The cost of a product is relative to the competition. It will remain roughly the same for anything because you need to beat competition.
A good industry design would take approximately 3 months and 4000 US dollars.
Quality means two things. One is product repeatability of performance, another is defects. Many products are not defective but simply non-repeatable. To get precision engineering of repeatable performance takes 1 year of research by a team of two really highly talented people. Their equivalent salary is around 200,000 dollars, in any country.
There is no shortcuts. You can build a "NEW" thing but there is no buyer. You can build an "Old item" but the competitions have all staked out grounds.
A product goes through several stages, starting from the earliest, hobby.
curiosity, hobby, interest
MVP (minimal viable product, which can be used to test buyer traction)
NRE mock up (Non recurring engineering)
Major costs include the following phases:
Phase 1: Planning and prototyping
Phase 2: Sample production
Phase 3: Volume production
Major costs for the planning and prototyping stage include:
Industrial design and function UI design
Hardware (non electrical parts) design
Major costs for sample production stage include:
Volume electronics production
Volume packaging production
Volume storage and shipping logistics
Volume standard conformation such as ISO and CE
Volume standard such as calibration and six sigma QC
Hiring or workers and rental of production space
Major costs for volume production include:
Factory and logistics
Downstream buyer and customer, or dealers
Arranging finances such as bank loans
Consumer electronics or hardware electronics is very difficult. You need GREAT industrial design fused with market, pricing knowledge and a team of great no bs talents to bake some secret sauce. Then there is the Chinese to take any idea and run the price to the floor any moment you gain traction. the best is to find a good category and apply western logo and niche down. For example, make "cute looking home appliances".
The Chinese appliance giants like Media is willing to run profit margin of 2%. The best days are over although pockets of opportunities can jump out. You need money to start making money.
Let's use the example of a device that is advertised on US websites broadly, an "AC cooling fan".
We do not make this device and we do not serve to advertise this product. We want to illuminate students about the RANGE of costs for bringing an idea to a business. The numbers provided are in US dollars and based on Chang Liu's experience as a factory owner and engineer.
For the factory, the major cost components include the following phases:
NRE phase (non recurring one time research and development)
manufacturing and logistics
This product will be distributed by marketing companies, with the factory (most likely located in China) providing for the marketing companies. The marketing company cost include:
shipping and logistics
Cost for NRE research:
mold design and prototype: 100,000 dollars.
circuit board design: 2 engineers for 6 months on payroll, about 30,000 dollars.
mechanical engineering design: 2 engineers for 6 months on payroll, about 30,000 dollars.
testing and laboratory tests, 2 engineers on payroll for 6 months, about 30,000 dollars
Cost for production phase:
Assume 1000 units produced by a contractor. Single unit materials cost include:
casing and molding: 10 dollars max.
circuit components: 10 dollars
circuit board and manufacturing: 2 dollars
Total cost for 1000 units: 1000x(10+10+2)=22000 dollars.
Cost for manufacturing phase;
Assume a build out of 10,000 units. Each item's cost will be lower than small volume phase. It is roughly estimated below:
casing and molding: 4 dollars each
circuit components: 10 dollars
circuit board and manufacturing: 1.5 dollars
A factory crew consisting of assembly and testing: 10 employees for a year payroll at 2000 dollars/employee/month (salary plus benefits).
Space rent for a year, let's say 600 sq. meters, for 2000 dollars/month for a year.
The total cost for production phase is
The total cost upto this point is: 10,000 units available at 441,000 dollars, roughly 3 million Chinese Yuan (RMB).
So the factory needs to sell this to the whole seller at 44 dollars each at base cost. The whole seller needs to sell this to the general public at perhaps 80 - 160 dollars each.
At this price, the customer would expect something very good looking and very high quality. Hence the early investment can not be cheap.
Words of Caution:
The factory did not get to this point, i.e., this order, by luck. For the retailer to find the factory, out of many factories, it takes years to build a relation, and the relation is build in the market, not on paper or in vacuum.
The factory owner needs to be well prepared and well trained (by his own experience). He needs to coordinate people, design, money, quality, and lowest price. If the owner is strong player, he can suggest his own price and the retailer would still order from him. For example, he can prescribe an "MSRP" manufacturer's suggested retail price so that all the retailers can not sell the item above the MSRP. If a retailer can arbitrarily increase or lower price (dump), then it will hurt the product ecosystem of suppliers and retailers.
By the way, this product may only have a life cycle of 4 months. It won't be as hot a product in next, and the competition would have mushroomed. So the factory and the retailer has a one shot chance to bombard the USA and target countries channels with advertisements (about 1000 dollars/day for SEO/placement/FB/etc). A single retailer's four month campaign would cost around 120x1000=120,000 dollars. At a "profit margin" of 120 dollars per unit (160-44), the retailer would need to sell 1000 units just to cover advertising, but then the retailer would make 9000x120= roughly 1 million dollars, and become a millionaire. Certainly the retailer has to pay for a lot of cost, but still that is how you build a product and get rich. It takes money and experience to make money.
The poor factory owner on the other hand, will make zero dollar profit by my previous analysis. He will only start to make profits when the number of orders goes beyond 10,000. If the factory asks for the retailer for a higher base price, say 60, then the retailer will decide if they agree or not because it will cut into his profit.
So far, the factory owner borrowed 440,000 dollars and, if he is lucky, made 440,000 dollars. This is called cash flow - borrow money from bank or company coffer, and return money to the work force and supply chain.